Of the hundreds of thousands of business ventures launched each year, many never get off the ground. Others fizzle after spectacular rocket starts.
Why such dismal odds? Entrepreneurs—with their bias for action—often ignore ingredients essential to business success. These include a clear strategy, the right workforce talent, and organizational controls that spur performance without stifling employees’ initiative.
Moreover, no two ventures take the same path. Thus entrepreneurs can’t look to formulas to navigate the myriad choices arising as their enterprise evolves. A decision that’s right for one venture may prove disastrous for another.
How to chart a successful course for your venture? Bhide recommends asking yourself these questions:
Where do I want to go? Consider your goals for the business: Do you want the rush that rapid growth delivers? A chance to experiment with new technology? Capital gains from selling a successful company? How will I get there? Is your strategy sound? Does it clarify what your company will and won’t do? Will it generate sufficient profits and growth? Can I do it? Do you have the right talent? Reliable sources of capital?
Improvisation takes a venture only so far. Successful entrepreneurs keep asking tough questions about where they want to go—and whether the track they’re on will take them there.
The Idea in Practice
A closer look at Bhide’s three questions:
Where Do I Want to Go?
To articulate your goals for the enterprise, clarify:
What you want personally from your business: An outlet for artistic talent? A flexible lifestyle? The immortality of building an institution that embodies your values? Quick profits? The kind of enterprise required: For example, if you want to sell your business eventually, you’ll need to build a sustainable enterprise—one that can renew itself through changing generations of technology, employees, and customers. And you’ll need a company big enough to support an infrastructure that won’t require your daily intervention. Your risk tolerance: For example, building a sustainable business entails risky long-term bets—including trusting inexperienced employees, personally guaranteeing debt, and tolerating delayed payoffs. Are your goals worth the attendant risks?
How Will I Get There?
Provide clear direction: Articulate the enterprise’s policies, geographic reach, capabilities, and decision-making framework—in concise terms that employees, investors, and customers can understand. Generate sufficient profits and growth: Ensure that your strategy will produce desired business results. For example, Mothers Work—which sells maternity clothing to professional women—took off only when its founder revised her strategy from mail order (which generated low profits owing to stiff competition) to retail stores. Serve the enterprise long-term: Anticipate future market saturation, intensified competition, and major technological change, then ensure that your strategy accommodates those future scenarios. Establish the right growth rate: Plan for a growth rate that will attract customers and capital without causing excessive stress for you and your employees.
Can I Do It?
A great strategy is worthless unless you can execute it. To do so, you’ll need the right:
Resources: Augment your workforce with employees possessing the skills, knowledge, and values needed to implement your strategy. A strong workforce attracts customers and investment capital. Infrastructure: Establish the organizational systems needed to execute your strategy. For example, suppose you want to build a geographically dispersed business, grow rapidly, and eventually go public. In this case, you’ll need to invest heavily in mechanisms for delegating tasks, specializing job roles, forecasting and monitoring availability of funds, and maintaining financial records. Role flexibility: To grow your business, your role must shift from doing the “real work” to teaching others to do it, prescribing desired results, and managing the work environment.
Of the hundreds of thousands of business ventures that entrepreneurs launch every year, many never get off the ground. Others fizzle after spectacular rocket starts.
A six-year-old condiment company has attracted loyal customers but has achieved less than $500,000 in sales. The company’s gross margins can’t cover its overhead or provide adequate incomes for the founder and the family members who participate in the business. Additional growth will require a huge capital infusion, but investors and potential buyers aren’t keen on small, marginally profitable ventures, and the family has exhausted its resources.
Another young company, profitable and growing rapidly, imports novelty products from the Far East and sells them to large U.S. chain stores. The founder, who has a paper net worth of several million dollars, has been nominated for entrepreneur-of-the-year awards. But the company’s spectacular growth has forced him to reinvest most of his profits to finance the business’s growing inventories and receivables. Furthermore, the company’s profitability has attracted competitors and tempted customers to deal directly with the Asian suppliers. If the founder doesn’t do something soon, the business will evaporate.
Like most entrepreneurs, the condiment maker and the novelty importer get plenty of confusing counsel: Diversify your product line. Stick to your knitting. Raise capital by selling equity. Don’t risk losing control just because things are bad. Delegate. Act decisively. Hire a professional manager. Watch your fixed costs.
Why all the conflicting advice? Because the range of options—and problems—that founders of young businesses confront is vast. The manager of a mature company might ask, What business are we in? or How can we exploit our core competencies? Entrepreneurs must continually ask themselves what business they want to be in and what capabilities they would like to develop. Similarly, the organizational weaknesses and imperfections that entrepreneurs confront every day would cause the managers of a mature company to panic. Many young enterprises simultaneously lack coherent strategies, competitive strengths, talented employees, adequate controls, and clear reporting relationships.
The entrepreneur can tackle only one or two opportunities and problems at a time. Therefore, just as a parent should focus more on a toddler’s motor skills than on his or her social skills, the entrepreneur must distinguish critical issues from normal growing pains.
Entrepreneurs cannot expect the sort of guidance and comfort that an authoritative child-rearing book can offer parents. Human beings pass through physiological and psychological stages in a more or less predetermined order, but companies do not share a developmental path. Microsoft, Lotus, WordPerfect, and Intuit, although competing in the same industry, did not evolve in the same way. Each of those companies has its own story to tell about the development of strategy and organizational structures and about the evolution of the founder’s role in the enterprise.
The options that are appropriate for one entrepreneurial venture may be completely inappropriate for another. Entrepreneurs must make a bewildering number of decisions, and they must make the decisions that are right for them. The framework I present here and the accompanying rules of thumb will help entrepreneurs analyze the situations in which they find themselves, establish priorities among the opportunities and problems they face, and make rational decisions about the future. This framework, which is based on my observation of several hundred start-up ventures over eight years, doesn’t prescribe answers. Instead, it helps entrepreneurs pose useful questions, identify important issues, and evaluate solutions. The framework applies whether the enterprise is a small printing shop trying to stay in business or a catalog retailer seeking hundreds of millions of dollars in sales. And it works at almost any point in a venture’s evolution. Entrepreneurs should use the framework to evaluate their companies’ position and trajectory often—not just when problems appear.
The framework consists of a three-step sequence of questions. The first step clarifies entrepreneurs’ current goals, the second evaluates their strategies for attaining those goals, and the third helps them assess their capacity to execute their strategies. The hierarchical organization of the questions requires entrepreneurs to confront the basic, big-picture issues before they think about refinements and details. (See the exhibit “An Entrepreneur’s Guide to the Big Issues.”) This approach does not assume that all companies—or all entrepreneurs—develop in the same way, so it does not prescribe a one-size-fits-all methodology for success.
An Entrepreneur’s Guide to the Big Issues
Clarifying Goals: Where Do I Want to Go?
An entrepreneur’s personal and business goals are inextricably linked. Whereas the manager of a public company has a fiduciary responsibility to maximize value for shareholders, entrepreneurs build their businesses to fulfill personal goals and, if necessary, seek investors with similar goals.
Before they can set goals for a business, entrepreneurs must be explicit about their personal goals. And they must periodically ask themselves if those goals have changed. Many entrepreneurs say that they are launching their businesses to achieve independence and control their destiny, but those goals are too vague. If they stop and think about it, most entrepreneurs can identify goals that are more specific. For example, they may want an outlet for artistic talent, a chance to experiment with new technology, a flexible lifestyle, the rush that comes from rapid growth, or the immortality of building an institution that embodies their deeply held values. Financially, some entrepreneurs are looking for quick profits, some want to generate a satisfactory cash flow, and others seek capital gains from building and selling a company. Some entrepreneurs who want to build sustainable institutions do not consider personal financial returns a high priority. They may refuse acquisition proposals regardless of the price or sell equity cheaply to employees to secure their loyalty to the institution.
Only when entrepreneurs can say what they want personally from their businesses does it make sense for them to ask the following three questions:
What kind of enterprise do I need to build?
Long-term sustainability does not concern entrepreneurs looking for quick profits from in-and-out deals. Similarly, so-called lifestyle entrepreneurs, who are interested only in generating enough of a cash flow to maintain a certain way of life, do not need to build businesses that could survive without them. But sustainability—or the perception thereof—matters greatly to entrepreneurs who hope to sell their businesses eventually. Sustainability is even more important for entrepreneurs who want to build an institution that is capable of renewing itself through changing generations of technology, employees, and customers.
Entrepreneurs’ personal goals should also determine the target size of the businesses they launch. A lifestyle entrepreneur’s venture needn’t grow very large. In fact, a business that becomes too big might prevent the founder from enjoying life or remaining personally involved in all aspects of the work. In contrast, entrepreneurs seeking capital gains must build companies large enough to support an infrastructure that will not require their day-to-day intervention.
What risks and sacrifices does such an enterprise demand?
Building a sustainable business—that is, one whose principal productive asset is not just the founder’s skills, contacts, and efforts—often entails making risky long-term bets. Unlike a solo consulting practice—which generates cash from the start—durable ventures, such as companies that produce branded consumer goods, need continued investment to build sustainable advantages. For instance, entrepreneurs may have to advertise to build a brand name. To pay for ad campaigns, they may have to reinvest profits, accept equity partners, or personally guarantee debt. To build depth in their organizations, entrepreneurs may have to trust inexperienced employees to make crucial decisions. Furthermore, many years may pass before any payoff materializes—if it materializes at all. Sustained risk taking can be stressful. As one entrepreneur observes, “When you start, you just do it, like the Nike ad says. You are naïve because you haven’t made your mistakes yet. Then you learn about all the things that can go wrong. And because your equity now has value, you feel you have a lot more to lose.”
Entrepreneurs who operate small-scale, or lifestyle, ventures face different risks and stresses. Talented people usually avoid companies that offer no stock options and only limited opportunities for personal growth, so the entrepreneur’s long hours may never end. Because personal franchises are difficult to sell and often require the owner’s daily presence, founders may become locked into their businesses. They may face financial distress if they become sick or just burn out. “I’m always running, running, running,” complains one entrepreneur, whose business earns him half a million dollars per year. “I work 14-hour days, and I can’t remember the last time I took a vacation. I would like to sell the business, but who wants to buy a company with no infrastructure or employees?”
Can I accept those risks and sacrifices?
Entrepreneurs must reconcile what they want with what they are willing to risk. Consider Joseph Alsop, co-founder and president of Progress Software Corporation. When Alsop launched the company in 1981, he was in his mid-thirties, with a wife and three children. With that responsibility, he says, he didn’t want to take the risks necessary to build a multi-billion-dollar corporation like Microsoft, but he and his partners were willing to assume the risks required to build something more than a personal service business. Consequently, they picked a market niche that was large enough to let them build a sustainable company but not so large that it would attract the industry’s giants. They worked for two years without salaries and invested their personal savings. In ten years, they had built Progress into a $200 million publicly held company.